'60/40' portfolios are facing worst returns in 100 years: Bank of America

[Sunset]

I'm sure I'm overlooking something but VWELX (Wellington 60/40) seems to have done well back in the 70's and 80's of high inflation and rising rates.

So far it has not done very well, it's basically much like VTI + BND in the 2:1 ratio.
I had some in a small Roth, and exchanged it all for VTI, since I'm not going to spend it for 10+ years, I'll let it run and see if VTI recovers than VWELX, but not having the BND anchor.

 

[Koolau]

No idea what else to try, so I'm sticking to my plan. I was expecting some up and downs. Looks like some downs are here. I'm more concerned right now about inflation than equities/bonds but what do I know?

 

[copyright1997reloaded]

So 6% for X years isn’t cool? OK.

With inflation at 8-9% an having to pay taxes on the interest, no NOT cool.

On a relative basis to an asset returning 0% or declining in value, yes good.
On an absolute basis, no not good.

People are getting delusional in these bond threads (even to the point where everything is becoming bond threads).

The bond-uber-alles folks: "I'm so stoked, I am getting 5% on this corporate bond!". In the meantime, food inflation is up 18%, inflation is spreading quickly into services, and economic conditions are deteriorating (thus increasing issuer risk).

The truth is that you are betting that inflation comes down, and quickly enough that your 5% bond doesn't have a negative real return over its lifespan.



Me? I'm there with you, in the sense that I've put a good chunk of change into short term T-Bills, figuring that -5% is better than -9%. But I'm not excited about it, or crowing that it is a good LONG term strategy. Because it is not.

Give me 3.5% real return yields (e.g. TIPS at 3.5% real), and I will be putting big $ (for me) into that.

 

[NW-Bound]

I have a few 100Ks in I bond that I accumulated back in the early 2000s. They pay 1 and 1.2% above inflation, meaning they pay more than 10% now.

Never thought that something I bought and stashed away as emergency funding could be the best performing component of portfolio.

Do I jump up/down with joy? No. I don't need to withdraw any, but when I do I will pay Fed tax on the gain, and the net return will be below cumulative inflation.

And over its life, my I bonds trail the rest of the portfolio. They used to be a bigger percentage of my stash, but were badly outgrown by the rest of the portfolio after 20 years.

 

[COcheesehead]

With inflation at 8-9% an having to pay taxes on the interest, no NOT cool.

On a relative basis to an asset returning 0% or declining in value, yes good.
On an absolute basis, no not good.

People are getting delusional in these bond threads (even to the point where everything is becoming bond threads).

The bond-uber-alles folks: "I'm so stoked, I am getting 5% on this corporate bond!". In the meantime, food inflation is up 18%, inflation is spreading quickly into services, and economic conditions are deteriorating (thus increasing issuer risk).

The truth is that you are betting that inflation comes down, and quickly enough that your 5% bond doesn't have a negative real return over its lifespan.



Me? I'm there with you, in the sense that I've put a good chunk of change into short term T-Bills, figuring that -5% is better than -9%. But I'm not excited about it, or crowing that it is a good LONG term strategy. Because it is not.

Give me 3.5% real return yields (e.g. TIPS at 3.5% real), and I will be putting big $ (for me) into that.

I look at the alternatives right now. I have a well run equity fund that is actually up year over year. So I have funds there, but if you are in an equity index you are likely down 20%+. So 6% if even temporary is fine by me. What folks forget is there is a trade opportunity before a call. If rates level or decline, a bond like this will sell above par. There is a window to make more than 6%.

 

[copyright1997reloaded]

I look at the alternatives right now. I have a well run equity fund that is actually up year over year. So I have funds there, but if you are in an equity index you are likely down 20%+. So 6% if even temporary is fine by me. What folks forget is there is a trade opportunity before a call. If rates level or decline, a bond like this will sell above par. There is a window to make more than 6%.

I don't know who folks are, but I am well aware of this.

I bought Ford 7.5% notes at 21.5 cents on the dollar in November 2008, which were redeemed (called) by Ford in Feb 2013. Here: https://www.quantumonline.com/search.cfm?tickersymbol=F-A*&sopt=symbol

So I collected 35.7% interest between late 2008 and 2013 AND made almost 5x in gains.

THAT is the kind of thing that can show up when things get bad. We are no where near those kinds of bargains yet. (And yes, I did understand that Ford had less than robust credit then, I bought those because I believed of the big-three automakers that Ford would be the survivor.)

Unfortunately for me, that was a modest investment because I was too [-]wise[/-] chicken sh*t to buy a lot.

 

[NW-Bound]

... So 6% if even temporary is fine by me. What folks forget is there is a trade opportunity before a call. If rates level or decline, a bond like this will sell above par. There is a window to make more than 6%.

Here, I agree with you. Yes, there are opportunities, but you have to be an active investor, and pay attention to your assets. And I have been active like heck, but just not in the bond market.

The Bogleheads don't believe that you can do anything but just buy and hold.

Do they bother to go vote at all, or just rely on fellow active voters to choose for them?

 

[Freedom56]

The Bogleheads don't believe that you can do anything but just buy and hold.

Do they bother to go vote at all, or just rely on fellow active voters to choose for them?

That's why they are Bogleheads. Money flowing into passive funds just create bubbles as these funds overweight stocks with the highest market cap. So they are voting but indirectly.

 

[daylatedollarshort]

The Fed is reducing the negative real interest rate issue monthly with each rate increase. Historically, interest rates had to go above the inflation rate in order to control inflation, which is pretty clearly where they are headed again. Why panic over negative real rates when they have been decreasing almost every month lately and will likely continue to decrease until the Fed reaches their 2% inflation target?

High inflation, with real interest rates, only hurts some, like bond holders with long term bonds (not ladders) locked in at lower rates, pensioners without cost of living increases and people who are in low demand jobs that don't get inflation adjusted pay. For most others, their pay and investment income will keep up with their expenses. Homeowners with low fixed mortgage rates and homes that increase with inflation can come out ahead, like in the article I linked to earlier in the thread.

 

[aja8888]

The Bogleheads don't believe that you can do anything but just buy and hold.

Do they bother to go vote at all, or just rely on fellow active voters to choose for them?

A couple of retirees I know here where I live are long time members of the BH's. They are quite well off and rely on their Wells Fargo Private Client person to manage their big stashes. These wealthy retirees I know like to play golf here and are members of Carlton Woods CC, the most exclusive club in the area.

They don't have time to mess with common investing stuff as their golf game is more important.

 

[daylatedollarshort]

There is a detailed Bogleheads review of individual bonds vs bond funds here:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

I think the 1 and 10 year returns for many of their favorite bond funds speak for themselves. Like look at the TIPS funds' performance. If you owned individual TIPS during that same time frame (and held to maturity and bought at par), and your principal would have gone up by almost 30% over the last 10 years, along with CPI inflation.

ETA: One of the main logic flaws in the BH approach is the assumption that one can only hold either fixed income or bond funds for any given period. Yet the opposite is true, one can buy fixed income when rates are rising and bond funds when rates are declining. I've posted a Kiplinger article many times that advocates that strategy. Bonds aren't stocks, so the same buy and hold strategy that works for stocks and stock funds can a money loser for bond funds.

 

[Looking4Ward]

So far it has not done very well, it's basically much like VTI + BND in the 2:1 ratio.
I had some in a small Roth, and exchanged it all for VTI, since I'm not going to spend it for 10+ years, I'll let it run and see if VTI recovers than VWELX, but not having the BND anchor.

Yes, it's down almost 21% YTD. The last two times it was at it's current price point was 12/1/2018 and 3/1/2020 after which it rose substantially.

The last time it was down over 20% for the year (2008), it gained 22% the following year and 11% the year after that.

I'm very curious to see what it does over the next 12-24 months.

 

[NW-Bound]

A couple of retirees I know here where I live are long time members of the BH's. They are quite well off and rely on their Wells Fargo Private Client person to manage their big stashes. These wealthy retirees I know like to play golf here and are members of Carlton Woods CC, the most exclusive club in the area.

They don't have time to mess with common investing stuff as their golf game is more important.

Oh sure. But I suspect that their wealth came from their career, not from their investments. Or if their career was in finance, it was some kind of active investment, not from indexing.

 

[NW-Bound]

There is a detailed Bogleheads review of individual bonds vs bond funds here:
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

Sorry to nitpick, but glancing through the article, I saw this bullet item:

"How long before a bond fund will at least return principle?"

It's principal, my pals, not principle (like Christ principles). Someone, please advise them to make an edit.

OK, now that it is out of the way, I will read their review more closely.

 

[aja8888]

Oh sure. But I suspect that their wealth came from their career, not from their investments. Or if their career was in finance, it was some kind of active investment, not from indexing.

Both oil company retired execs. I play golf with them a couple of times a year in local events. Neither has extensive investing experience but follow the markets, check the BH site from time to time and do what their WF Client managers recommends. Their biggest concerns are family trust fund management.

 

[OldShooter]

... if their career was in finance, it was some kind of active investment, not from indexing.

Decades of studies and data says active investment strategies lose to indexing. But that doesn't mean people can't make money with a strategy that is statistically suboptimal. I don't think one can draw any kind of conclusion from a few vague anecdotes.

 

[NW-Bound]

Both oil company retired execs. I play golf with them a couple of times a year in local events. Neither has extensive investing experience but follow the markets, check the BH site from time to time and do what their WF Client managers recommends. Their biggest concerns are family trust fund management.

If you have enough money, you can just buy CDs.

I remember this story.

One day, Groucho Marx was visiting the NY Stock Exchange. A floor trader yelled to him "Hey Groucho, where do you invest your money?" Marx yelled back "I bought Treasuries". The trader said "They don't make you much money". Marx shot back "They do, if you have enough of them".

Now, it was said that Marx lost all his life savings in the 1929 crash, hence swore off stocks since.

 

[NW-Bound]

Decades of studies and data says active investment strategies lose to indexing. But that doesn't mean people can't make money with a strategy that is statistically suboptimal. I don't think one can draw any kind of conclusion from a few vague anecdotes.

It may be true.

But same with voting, my single vote is not going to change history. I still want to choose what I believe is right.

Of course, with my own finance which is a lot more important than choosing the correct lesser evil politician, I have to hedge against being totally wrong.

Hence, I spend more time looking at my assets than to listen to politicians talk.

 

[youbet]

Me? I'm there with you, in the sense that I've put a good chunk of change into short term T-Bills, figuring that -5% is better than -9%. But I'm not excited about it, or crowing that it is a good LONG term strategy. Because it is not.

Give me 3.5% real return yields (e.g. TIPS at 3.5% real), and I will be putting big $ (for me) into that.

+1.

A solid outlook IMHO.

 

[Koolau]

It may be true.

But same with voting, my single vote is not going to change history. I still want to choose what I believe is right.

Of course, with my own finance which is a lot more important than choosing the correct lesser evil politician, I have to hedge against being totally wrong.

Hence, I spend more time looking at my assets than to listen to politicians talk.

Sometimes picking both politicians and finances seem a choice to "lose less" if you make the right decision. Sad.

 

[NW-Bound]

More often true with politicians than investment choices, in my view.

However, investing at this moment is all about minimizing loss. With high inflation, cash is no longer a default safe option, and gold price is dropping.

The only things going up are perishable commodities. You cannot stockpile commodities, and dealing in futures is something I will not play.

I have no place to hide.

 

[Freedom56]

More often true with politicians than investment choices, in my view.

However, investing at this moment is all about minimizing loss. With high inflation, cash is no longer a default safe option, and gold price is dropping.

The only things going up are perishable commodities. You cannot stockpile commodities, and dealing in futures is something I will not play.

I have no place to hide.

Why are you so obsessed with inflation? I just avoid buying when goods and services are overpriced. Most people do the same. This is why inflation is self-correcting. Look at the price of PCs, TVs, and other electronics compared to a year ago. They are crashing fast. Go visit your local Home Depot and you will see that prices have dropped substantially for building products and people are still not buying. It's not like people are starving today because they can't afford to buy food. I just focus on preserving capital and generating as much income as possible.

 

[NW-Bound]

I don't spend anywhere close to what I can, so have not cut back on buying anything that I need.

I am not obsessed about inflation, but very concerned. Inflation is high not just in the US, but throughout the world. It can lead to turmoil and social unrest. It can result in worse things than trimming my stash.

I hope inflation will subside quickly as you say. Not looking to be able to buy Treasury at double-digit rate as it was in 1980.


PS. Speaking of generating income, I managed to sell some OTM call options to generate around $1400 cash today, and that was in between shooting the breeze here on this forum, and tilling a section of a planting bed in the backyard in preparation for winter veggies.

 

[Freedom56]

I am not obsessed about inflation, but very concerned. Inflation is high not just in the US, but throughout the world. It can lead to turmoil and social unrest. It can result in worse things than trimming my stash.

We just spent six weeks in Switzerland with trips to France and Northern Italy. With the strong dollar, it's a bargain compared to years ago. There isn't a hint of social unrest but just a lot of disdain for the war. The only concern over there is Putin, heating, and electricity. There were more American tourists there than I have every seen during the past 31 years and we were there late in the travel season (end of August through early October).

Medical and prescription drugs costs have been soaring for a decade with annual increases that are substantially higher than the current CPI number. Have we seen any social unrest because of that? We only saw one CEO(the Pharma Bro) go to jail so far.

 

[OldShooter]

I have never had anywhere near enough money to buy myself a politician, even an ineffective one.